Vietnam should allow further exchange rate flexibility: WB

Vietnam should “consider allowing further flexibility in the exchange rate, including through a quicker pace of depreciation of the reference rate,” as the U.S. Federal Reserve (Fed) is expected to continue raising interest rates, the World Bank said.

"This could be complemented with continued use of reference interest rates, especially if faster depreciation leads to higher inflation and inflation expectations rise," the bank noted in a November report.

Vietnamese economy would face strong headwinds, such as slowing external demand and tightening global financial conditions affecting the exchange rate, rising inflation and tightening domestic financial conditions affecting domestic demand, according to the WB.

For the exchange rate pressure, the country could utilize direct foreign currency sales judiciously to preserve the foreign exchange reserves, it noted.

The institution also emphasized fiscal and monetary policy coordination would play a key role in ensuring price stability amid growing domestic core inflation.

Amid tightening of global financial conditions and the strengthening of the U.S. dollar, the official VND/USD exchange rate continued to depreciate. In the year to November 3, the Vietnamese dong depreciated 9.1% against the greenback, WB data shows.

The State Bank of Vietnam (SBV) has already responded to depreciation pressure by widening the USD/VND daily trading band to 5% from the previous 3% on October 17 and raising key interest rates by further 100 basis points on October 25. In particular, the discount rate increased from 3.5% to 4.5% and the refinancing rate from 5% to 6%.

The SBV has sold about $22 billion from its foreign exchange reserves so far this year, bringing it down to about $87 billion, according to ACB Securities (ACBS).

The brokerage firm said the selling equals 21% of the reserves in 2021; and that Vietnam’s forex reserves are now equivalent to 12 weeks of imports, still "within the safety threshold".